Food & Drink

Dollar Stores Want to Be Grocery Stores, But Cheaper

Dollar stores have added plenty of food—and alcohol—to their shelves in recent years to lure customers who are interested in more than disposable cups and paper goods. Offering speed, goods in smaller volume, and value, the strategy seems to be working. The addition of products, from milk and eggs to brand-name packaged goods such as Special K (K)cereal and Hamburger Helper have resulted in rising food sales at chains such as Dollar General (DG), Family Dollar (FDO), and Dollar Tree (DLTR).

As more consumers see the dollar store as a legitimate place to shop for food, manufacturers—from such giants as General Mills (GIS), which recently started selling Fiber One products in the dollar outlets, to trendy startups like vegan mayo maker Hampton Creek—are vying with the chains’ more-profitable private brands for shelf space. To compete, manufacturers are adapting their products for dollar store consumers.

Unlike value shoppers who buy in bulk from super-centers such as Costco (COST), dollar store shoppers prefer smaller packages, which lowers sticker prices while pleasing older customers and those in small households. “Here, we market our products in smaller package sizes—perfect for one- and two-person households—which include many of the 55-year-old-plus consumers,” General Mills Vice President Shawn O’Grady said at an investor conference in early July.

Here’s how Hampton Creek, which has been selling throughWhole Foods (WFM) and just started selling in Dollar Tree stores, varies its pricing. There’s no denying that a $1 jar of mayonnaise is cheap—although Costco offers the best per-ounce price if you need 64 ounces of vegan mayo.

Graphic by Bloomberg Businessweek

Dollar stores will become increasingly important for food companies, according to researcher Todd Hale, senior vice president of consumer insights at Nielsen (NLSN): They’re expanding quickly, making it easier for consumers to buy low-cost, everyday goods without lengthy shopping trips. The vast supply of dollar stores in the U.S. makes them convenient for quick shopping trips.

Nielsen

More are coming, too. The number of dollar stores and convenience stores has been growing faster than that of grocery stores and mass merchandisers.

Nielsen

Most grocery runs are quick trips, with proximity mattering to consumers.

Nielsen

And quick trips are already the dollar store specialty. Customers go there to buy things they need immediately, not to stock up.

While lower-income shoppers and women shop more frequently at dollar stores, higher-ticket items sell, too. About 20 percent of sales come from households earning more than $70,000 per year.

Nielsen

Wong is an associate editor for Bloomberg Businessweek. Follow her on Twitter @venessawwong.